Ten Tips to Protect Investors From Any Financial Storm
Written by Alan Haft
Here’s a morbid thought - which would you rather experience; an earthquake or hurricane?
Tough choice? For me it’s not.
Having lived through both, experience tells me an earthquake happens “just like that," with no preparation, no foreshadowing, no time for anything except to hold on for dear life.
On the flip side of the coin, we have the evil and nasty hurricane. At least with those things, we have some time to prepare. Endless weather reports, waiting around to see if the thing is actually going to hit and stocking up at Costco for extra Kool Aid. Tedious, yes, but plenty of time to prepare is a good thing.
Hurricanes remind me of the storms brewing around the world right now. With the Euro going bust, rising unemployment and skyrocketing deficits, we have a fuse box of derivatives that might ignite any number of unpredictable chain reactions.
I figured it couldn’t hurt to share ten things you can do to in case a giant category five does actually hit. In no order of priority, here’s my list:
1. IN STOCKS?
“Should I be in stocks?”
I hear this one all the time. In addressing this, the most important thing you should be asking yourself is, “how much time do I have until I need my money?”
If your answer is something to the effect of “within a few years,” then regardless of what’s happening around the world right now, the answer is “no, you shouldn’t have much exposure to them.” You should have a higher concentration in more defensive things such as cash and/or short term bonds.
Not sure what you should do? Use the Rule of 100 as a guideline (or the Rule of 120, given we’re living longer these days): subtract your age from whichever number you please and the answer is the ballpark percentage of a diversified stock portfolio you should be invested in.
Sometimes it’s as simple as that.
2. QUALITY IS KING
Speaking of stocks, you should also be asking yourself something to the effect of “what kind of stocks am I in?”
If you’re invested in Johnny’s Lemonade Stand Company that was launched by skinny Johnny across the street last Saturday, needless to say, you have a far worse chance of weathering a storm as opposed to being invested in a blue chip company that’s been around a hundred years with deep pockets to weather through the bad.
In this day and age, quality reigns supreme.
3. CASH RULES
My beautiful CFP mom used to say, “cash flow minimizes the ills.”
Imagine this: your stocks get pummeled by Hurricane Deficit and while you’re holding on waiting for them to come back, they’re paying you cash along the way.
Sound good? It certainly does to me. I dig the ring to it and that’s why I like high quality stocks that send me dividends to pay for a couple of Doritos while I wait for its value to come back.
Speaking of food....
4. NATIONAL OR MULTI-NATIONAL?
Quarter Pounder with cheese? On a very rare rushed occasion I’ll force myself to down one of these babies (and regret it). But if that’s not bad enough, given Mickey D’s makes around half their money overseas, these days my stock portfolio might not like this little key fact as well.
Especially during these times, knowing a little about where your companies generate their revenue from is essential. After all, should France explode, you certainly don’t want to find out after the fact that your company makes all their money from selling purses to the French.
5. EMBRACE THE SALE
Imagine this: Best Buy is on fire and the cranky CEO blurts out, “big screens on sale for a hundred bucks!”
Would you head to the store? I would. And that’s why if all hell breaks loose, the markets just might be blurting out the same.
Apple at ten bucks? Bring it on.
At the moment the market is washing out to sea, you’ll very likely find some great bargains sloshing around in those stormy riptides.
6. BONDS: LOOKING GOOD?
Feeling good about those bonds you’re in? Great. If Hurricane Iran vs Israel crashes up shore, decent chance they shouldn’t suffer as much damage as your stocks. But knowing how long your bonds are is more important than you might think.
Rule of thumb: the “longer” the bond, the more likely they’ll lose value if interest rates spike. Conversely, the shorter the bond, the less you should suffer.
Confused? Don’t know what I’m talking about? I don’t blame you. This stuff can be tricky.
That’s what tip nine is for. Hang in there and embrace the anticipation because that one is coming right up.
7. CREDIT COUNTS
Whether you’re invested in individuals or a fund of bonds, similar to understanding your bond’s length is the importance of knowing its credit quality.
Maybe you’re holding a bond that’s tossing off nine percent. Fantastic. Good stuff. Well done. High five. But more importantly, ask yourself “why is it throwing off that much?” Chances are the credit quality of that bond isn’t all that great.
Can anyone say “Johnny’s Lemonade Stand?”
If Hurricane Deficit flares up, remember Warren Buffet’s famous line, “Only when the tide goes out do you discover who's been swimming naked.”
Translation: the swimmers might look good from the chest up but when the tide goes out...look out. Even the most attractive of the bunch could inspire starving sharks to eat those Quarter Pounders with cheese instead.
8. HEDGE IT
Not sure what to do? Who can blame you? Few people do, and those who say they do typically don’t know what they’re talking about.
That’s why the smart guys often hedge their bets by tossing a small amount of gold into their mix with some inverse ETFs and things called “stop losses” sometimes thrown in as well.
Might not be a bad call. Be sure to crack open a cold one and check these out.
And that’s what tip nine is all about...
9. EDUCATE YOURSELF
I didn’t like school all that much; the food was terrible and the good looking girls never paid any attention to me. But no doubt, a good education is indeed important, and that’s what this one is all about.
Humbling, but the truth of the matter is that with rare exception, when it comes to your retirement, you’re very likely on your own.
For most, the days of rock solid pensions are long gone and as such, you really need to educate yourself.
And with that, congrats. If you made it this far into my piece, not only are you my hero but you at least have some interest in building your nest egg on a stronger foundation.
Last, but not least, (drum roll please), because this one is at the very top of my list....
10. DON’T PANIC
Should markets fall, Europe implode or Uncle Sam catch fire, don’t panic. Remember: the worst of times are often followed by the best.
Educate yourself, follow the tips above, hang tough, think “quality” and congrats: during this very unpredictable time we’re in, we all just might find some shelter from the storm.
About the Author: Alan Haft is a retirement income planner, author of three books including the national bestseller, You Can Never Be Too Rich, and makes frequent appearances in national print, television, and radio media. He can be reached at [email protected].